Risk looms as S&P 500 positioning reaches extended levels: Citi

Investing.com — Positioning in the has reached extended levels, surpassing a three-year high, according to Citi strategists. The benchmark index stands out as an outlier compared to other markets, where conviction appears relatively low.

The last time positioning was this stretched, strategists note, the S&P 500 experienced a pullback of over 10% over the following 2-3 months.

While they do not advise investors to reduce their exposure, strategists flag the increased positioning risks when markets become overextended.

“The one difference between now and then is that the profit and loss (P&L) was stretched – investors and accumulated large profits, whereas current P&L, while positive, is by no means stretched, suggesting less capital at risk and therefore less motivation to cover if markets pull-back,” Citi’s team said in a Monday note.

In Europe, sentiment appears mixed, but the overall trend is positive. has seen a reduction in short positions, supported by recent flows and new long positions. European banks remain a favored sector, with positioning heavily long.

Elsewhere, the initial wave of trading following China’s stimulus announcement has slowed. For the , positioning is now neutral, while the is more net long, according to Citi.

Both markets have seen their net positions decrease compared to three weeks ago, as investors initially moved to mitigate risk by covering shorts or reducing underweights.

“We expect further volatility as more stimulus announcements are made or evidence of growth emerges,” strategists wrote.

While the recent reduction in the 1-year and 5-year loan prime rates (LPRs) by the central bank was expected, such developments are likely to continue influencing market positioning. In particular, fiscal policy announcements anticipated later in the year are a focal point.

For the and , Citi said no significant changes in positioning have been observed, with both markets remaining neutral.

Meanwhile, the has gained nearly 10% from its August lows, with long positions building, particularly following the addition of new longs last week.